Welfare Economics

One of the newsletters last month (How unequal is Bolivia really?) argued that it is better to measure inequality on consumption than on income, as income is very imperfectly measured, especially in poor countries with a large share of self-employment. The newsletter also suggested that when measuring inequality on consumption, United States is probably more unequal than Bolivia. The latter appears to be incorrect, as one careful reader kindly pointed out.

The study by Krueger & Perri (2006) investigates the relationship between income inequality and consumption inequality in United States and find that the consumption based GINI coefficient is about 11 percentage points lower than the income based GINI coefficient (1), which would bring consumption inequality in the US much below consumption inequality in Bolivia.

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“In Bolivia there are informals and there are idiots”
Luis Alberto Quiroga

The informal sector is often perceived as a sector for excluded, un-educated, low productivity workers who cannot get a “real” job. According to last week’s seminar on Informality in Bolivia organized by the Superintendencia de Empresas and CAF, this perception is quite misleading.

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It is difficult to imagine a country more unequal than Bolivia. Some people live in simple one-room dwellings without electricity, piped water, bathroom, or any other basic conveniences, and only get to spend a dollar on special days. Other people live in big mansions with home cinema, swimming pool, fitness room, and plenty of servants.

You don’t need to calculate Gini coefficients to see that Bolivia is clearly more unequal than Denmark. But to assess more subtle differences, it is necessary to rely on more than casual observation.

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“Sometimes when we are generous in small, barely detectable
ways it can change someone else’s life forever.”
Margaret Cho

Generosity is a very admirable trait, but sometimes generosity backfires. The most horrific example I can think of, is poor parents chopping off the hands of their children in order to make them more effective beggars.

Each individual donation is rarely harmful, and probably much needed, but when millions of such donations are made every day over decades, it can change incentives in undesirable ways, as in the example above. Read More »

United Nations has named 2008 the International Year of Languages, recognizing that genuine multilingualism promotes unity in diversity and international understanding.

While the first-best solution in terms of international understanding and efficiency would be to have just one universal language, there is so much nostalgia and nationalism in the World that this is not realistic in the near future. The second-best solution for individuals living in the present multi-lingual world is therefore to acquire fluency in several main languages.

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By international comparisons, income inequality in Latin America is extremely high. Most Latin American countries have Gini coefficients in the 0.45 – 0.65 range, while most European countries fall in the 0.20 – 0.40 range together with China and India. United States fall in between the two groups with a Gini coefficient of 0.40 – 0.45, depending on the year (1).

However, inequality measures by themselves say little about fairness. Inequality could be perfectly fair if the rich were rich because they had studied diligently, worked hard, invested wisely and provided valuable services to their community, while the poor were poor because they were lazy, selfish or dishonest.

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Economists play an important role in the implementation of economic policies and thus in the construction of societies. So, it is logical to think that a good design and implementation of economic policies require good economists. These economists should be solidly formed not only in the handling of analytical tools but also in the understanding of the economic, social and institutional realities of their countries. The formation of this analytical, observant and practical economist does not finish in the university, but usually it begins there.

Together with two co-authors, I have just finished a paper on economics training in Bolivia and Chile (1). A better understanding of how new economists are formed in these countries would help to understand how economic analysis and political decisions are made in these countries.

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“It is a miracle that curiosity survives formal education.“

Albert Einstein (1879 – 1955)

“I have never let my schooling interfere with my education.”
Mark Twain (1835 – 1910)

Every year, more than 130 million children are born on this globe (1). Each of them are endowed with a set of innate talents, which can be cultured for many different uses. Some manage to use their talents for the benefit of the World, while others use them for privately profitable, but socially damaging, activities. Unfortunately, most talent is simply wasted.

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Women in the informal sector generate much lower incomes than other population groups in Bolivia, and it is natural for the development community to want to help this group through specific policy initiatives targeted at this group. Indeed, I have been hired to study the problem and come up with gender and sector specific policy recommendations on how to help informal business women grow their micro-enterprises and become formal (1).

Unfortunately, I have come to the conclusion that most such initiatives would be either wrong, ineffective, or counter-productive.

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During the crisis of 1999-2003, most economic and social indicators in Bolivia showed significant deteriorations — even the ones you would not expect to. While poverty rates and unemployment rates may go up during a recession and progress in the provision of basic services may stagnate, you would not expect the education levels of adults to go down, nor the share of households who use electricity in their house to decrease.

But according to the annual MECOVI household surveys carried out in Bolivia this is exactly what happened. The share of people who use electricity in their house went down from 71.2% in 1999 to 69.1% in 2003/4, and the share of the working age population who has university level education went down from 11.8% in 1999 to 9.9% in 2003/4.

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